Template-type: ReDIF-Paper 1.0
Author-Name: Magacho, Guilherme R.
Author-Email: guilherme.magacho@fgv.br
Author-Workplace-Name: PPGE\UFABC and FGV
Author-Name: Spinola, Danilo
Author-Email: spinola@merit.unu.edu
Author-Workplace-Name: Maastricht University, UNU-MERIT
Title: Supply and demand in Kaldorian growth models: a proposal for dynamic adjustment
Abstract: This paper analyses the dynamic adjustment of supply and demand in
	 Kaldorian growth models. We discuss how the growth rate of a country
	 given by the demand constraints may adjust towards the growth rate given
	 by the supply-side (and vice-versa), presenting the necessary conditions
	 for this adjustment. Our main conclusion is that, for a monopolistic
	 economy, where firms invest to maintain a constant level of capital
	 utilisation, there are no capital constraints and hence the degree of
	 capacity utilisation is not affected by this adjustment. Nevertheless,
	 depending on specific conditions, an economy may face labour
	 constraints, and thus an adjustment mechanism is necessary. The
	 Palley-Setterfield approach for this dynamic adjustment brings a
	 possible reconciliation to supply- and demand-side long-term growth
	 rates. It emphasises the endogeneity of the income-elasticities of
	 demand for imports and the Verdoorn coefficient to utilisation capacity.
	 However, some considerations about labour market have to be discussed in
	 order to understand the characteristics and limitations of this
	 approach. In this sense, we draw from the McCombie (2011) critique, in
	 which employment adjusts immediately to guarantee equilibrium between
	 supply and demand. We propose reconciliation between the
	 Palley-Setterfield and the McCombie approaches, and present a model with
	 a labour market adjustment in which both types of adjustments represent
	 extreme cases, discussing the existence and the characteristics of
	 intermediate cases. 
Classification-JEL: E12, F43, O41
Keywords: economic adjustment, demand-led growth, natural rate of growth,
	 Kaldorian growth models
Series: UNU-MERIT Working Papers
Creation-Date: 20200804
Number: 2020-032
File-URL: https://unu-merit.nl/publications/wppdf/2020/wp2020-032.pdf
File-Format: application/pdf
File-Size: 275 Kb
Handle: RePEc:unm:unumer:2020032